Jeff Zients was with Obama for the long haul — and now he’s going long in investing

Jeffrey Zients was the businessman’s businessman in the Obama White House — someone whom corporate leaders felt they could talk to in an administration they often thought was too tough on them.

by Thomas Heath via The Washington Post

Jeffrey Zients used to talk with his boss, former president Barack Obama, about the benefits of long-term investment, whether in policymaking or in business. (Marvin Joseph/The Washington Post)

Former President Barack Obama said in an interview that they liked Zients over the president or his inner circle because they considered Zients one of their own.

“The truth is that Jeff’s policy perspectives were not significantly different than my own on most economic issues,” Obama said. “It’s just that Jeff was a rich, successful businessman, so when he said it, it sounded better to them than when I said it.”

But now that he’s out of government and setting off on a new business venture of his own, Zients is embracing a strategy that in many ways shuns the thinking of so many of America’s corporate titans.

With Wall Street investor Vincent Mai, he is building the Cranemere Group, a budding conglomerate that wants to be another Berkshire Hathaway — Warren Buffett’s $500 billion colossus.

They are rejecting the debt-fueled buy-and-sell grind of private equity and doing it old-school like Buffett — looking for value where others have missed it and investing for the long-long term.

Zients, 51, said that during his eight years in the Obama White House — “I turned out the lights on the way out” — he and the president talked about the advantages of durability. They discussed the benefits of long-term investment, whether in policymaking or in business.

Mai and Zients are shying away from practices that have been the rage in finance for three decades. Private equity, which is another name for leveraged buyouts, created hugely successful investment firms such as Blackstone Group, the Carlyle Group and KKR. Those firms have begun calling themselves “alternative asset managers” as takeover targets have grown scarcer.

“This Cranemere model goes back to Warren Buffett,” said Mai, Cranemere’s founder and chairman. “This contrasts with ­private-equity’s incentive to sell the good company and then face the challenge and risks of finding another one to acquire. ”

Zients’s return to free enterprise is a pivot from his two terms — talk about long-termism — in the White House. Zients is comfortable at the center of a storm. He was the White House’s Mr. Fix-It who engineered the rescue of HealthCare.gov.

Obama called Zients “invaluable.”

“He is wicked smart,” Obama said. “But he also combines that with a good bedside manner. He always projects a sense of being much more concerned about getting the job done than who’s getting the credit.”

Business leaders felt ignored by the Obama White House.

“Jeff is a staunch capitalist who was operating in an environment that was not consistently on the same page as he,” said Josh Bolten, chief of staff to President George W. Bush and president of the powerful Business Roundtable.

“Somebody had to deal with business, and Jeff appreciated entrepreneurs because he was one of them,” said Thomas J. Donohue, president of the U.S. Chamber of Commerce. “They were of the belief that the best thing to do was regulate everything.”

“The Obama administration was not anti-business,” said investment banker Roger Altman, a Democrat who served as deputy U.S. treasury secretary under President Bill Clinton. “Zients was in the administration as well as Tim Geithner. But if you want to grade which administration was more focused on, and sensitive to, business — Clinton or Obama — my answer is Bill Clinton.”

Long-term holdings

Mai and Zients are looking for ignored, undervalued companies with strong finances and a path toward growth.

“I love big, boring sectors of the economy,” Mai said. “We are looking for businesses sized from $200 million to $1 billion.”

Cranemere has already bought two companies. One is a Poland-based business named Marmite; it’s a low-cost manufacturer of high-end bathroom wash basins, bathtubs and shower trays. Mai said it has a dominant position in the marketplace. The other is Exemplis, a manufacturer of ­custom-built office chairs that’s based in Southern California.

“They make 7,000 chairs a day with a factory in Southern California and another plant in Mexico,” Mai said. “It was founded by two entrepreneurs, one of whom wanted to retire.”

“They are going to hold these companies for a long time and really develop them,” Donohue said. “They are not the guys that are rolling companies all the time.”

Mai, 78, is a liberal Democrat who built his reputation and fortune on the very leveraged buyouts firms with whom he now competes. For two decades, he ran AEA Investors, an invitation-only, private-equity pioneer that author Ron Chernow once described as “a billion-dollar club for retired Fortune 500 CEOs.”

Mai said he simply gets more satisfaction from owning and growing a company.

“I didn’t like selling companies that I didn’t want to sell,” Mai said of his days in private equity.

He still laments the sale of Burt’s Bees to Clorox, an investment that he says netted AEA about seven times its money. Mai said he loved working with Burt’s Bees and its creator, Roxanne Quimby, “who was the crazy genius. We bought it from her and insisted she keep 20 percent because we wanted her genius.”

“There are people who own businesses who want to find a really good home for the business,” Altman said. “Vincent is one of the few people that owners of those businesses reach out to because of his dedication to quality.”

He said his win-loss record at AEA was 32-1. The loser was a big investment in Rand McNally, the privately held mapmaker.

After exhaustive research, Mai said, “our conclusion was the Internet would not destroy it. We would be the go-to place on the Internet for maps.”

In the end, however, “we were crushed by technological transformation.”

Cranemere, named for a farm in Mai’s native South Africa, is privately held with close to $1 billion in capital. Its 21 shareholders are wealthy families, institutions and sovereign wealth funds. Mai and Zients have invested a considerable amount of their personal fortunes in Cranemere and earned ownership shares — “sweat equity” — for running Cranemere.

Unlike publicly held Berkshire Hathaway, Cranemere is valued annually by an independent appraiser. Profits from its businesses increase the value of Cranemere’s shares by keeping cash on hand or by reinvesting its free cash flow — the money left after expenses and capital investments like infrastructure — in more businesses.

“Think of a snowball effect,” said Mai, borrowing from the title of a biography that encapsulates Buffett’s investing philosophy. “By reinvesting free cash, the snowball is getting bigger and bigger.”

Mai said Cranemere’s board may someday vote to return value to shareholders through dividend payments, but he does not expect that to happen soon.

Cranemere has no fees, such as the 2 percent model that private equity employs. Profits from Cranemere’s companies pay for a staff of 32, including analysts, and offices in New York, London and Frankfurt, Germany.

“We want to keep it a relatively small group of like-minded shareholders,” Mai said. “We want their growth to come from compounding of excess cash, not from issuing new shares.”

Smooth operator

Zients has more technocrat in his DNA than investor.

“Most of my career has not been as an investor. It has been as an operator,” said Zients, during an interview in the kitchen of an old mansion near Dupont Circle, which serves as Cranemere’s Washington office and the offices of the Urban Alliance philanthropy founded by his family and friends two decades ago. “The focus of my career has been execution. I like putting together teams, setting goals and executing to get stuff done.”

But even Obama said Zients had more patience than the president when it came to managing the bureaucracy.

“Sometimes, he was, I’m going to say, ‘too nice,’ ” Obama said. “But ultimately, it paid off because when decisions were made, everybody felt as if they had been heard.”

Zients is one of a cadre of successful Washington business executives who made fortunes early in life and have extended their interests into other fields. His close friend Rep. John Delaney (D.-Md.) made millions in banking and is running for president. Venture capitalist Mark Ein owns the Washington Kastles tennis team and recently bought an interest in Washington City Paper.

Zients took Washington entrepreneur David Bradley’s two consulting companies — the Advisory Board and Corporate Executive Board — public nearly two decades ago. He was in his early 30s and reaped $135 million from the offerings, a sum that has since compounded.

Zients invested with Delaney in a hip San Francisco messenger-bag company called Timbuk2. He also made investments in health care.

This past week he was named to the board of directors of Facebook, which has reshuffled its management in the wake of a data scandal.

He has a soft spot for restaurants. He owns parts of several and recently invested with Timber Pizza Co. entrepreneur Andrew Dana in a new deli named Call Your Mother.

A Democrat, he turned to government service.

Zients recalls: “Sen. Mark Warner called me and said, ‘I just got a call from the White House Personnel Office and they’re looking for someone with business background to join the administration as the first chief performance officer and the deputy at the Office of Management and Budget.’ ”

Obama announced Zients’s nomination in his Saturday morning radio address a few weeks later. He went on to serve as director of the National Economic Council.

The big test came in October 2013, after the Obamacare website, known as HealthCare.gov, collapsed.

Denis McDonough, Obama’s former chief of staff, recalls a walk on the White House South Lawn where he asked Zients if he would rescue the website.

“I said, ‘Look, we need somebody to lead an effort to fix this thing.’ He didn’t miss a beat. He said, ‘Yeah, I’ll take it,’” McDonough recalled. “I call him the firefighter. Firefighters answer the alarms.”

“HealthCare.gov was a five-alarm fire,” Obama said. “For him to come in calmly and organize a big team that included essentially tech volunteers from out of government and set up a war room and systematically execute so that fairly rapidly it was performing the way it was originally intended was an enormous achievement.”

Mai and Zients had many discussions over years in New York and Washington about how to manage government and business problems. They culminated in a job offer to Zients last fall.

With Cranemere, Mai said, “We are trying to create a distinctive firm that is not only good at what we do but is admired.”

“This short-termism in the economy to make a penny leads to 60 to 70 percent of senior management teams forgoing great investments to make a quarter,” Zients said. “That’s what got me passionate about doing something in the long term.”